4. Final remarks
Surveying the intergenerational distribution effects of social security, we have attempted to cover basic theoretical insights as well as a broad selection of recent policy relevant applications based on numerical overlapping generations models. Given the formidable size of this literature, our survey is selective and we have not covered several issues which are important for the theoretical discussion and the social security reform process in many countries. In closing this survey we stick to our broad focus and highlight two important issues that are likely to shape the next steps in this field.
First, the discussion in the two previous sections shows a clear distinction between the risk analysis in theoretical and numerical models. Whereas the former focuses on aggregate risk and intergenerational risk sharing, the latter concentrates on idiosyncratic risk and intragenerational risk sharing. To a large extent this reflects that numerical models in the past were restricted to idiosyncratic risk mainly for technical reasons. Advances in computer technology have recently made it possible to simulate more sophisticated overlapping generation models with aggregate risk, however. As soon as it is possible to include a transition path in models with aggregate risk, the efficiency effects of social security could be quantified from a new perspective. This will allow the theoretical and the empirical discussions of risk and risk sharing issues in social security to be more closely connected.
Second, despite all differences, both the theoretical and the numerical studies with aggregate and idiosyncratic uncertainties share a common characteristic. They both highlight the insurance properties of social security systems and, for this reason, social security tends to appear more favorable in terms of economic efficiency than in older studies based on deterministic models. We conjecture that future quantitative studies which include aggregate risk will strengthen this general trend.
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Table 1.1: Old age dependency ratios
Ratio of population aged 65 and above to population aged 15 – 64, selected countries, per cent
2000 2015 2030 2045
France 36.4 43.9 59.3 67.7
Germany 33.3 40.2 56.6 65.3
Japan 25.3 45.4 58.8 75.9
United Kingdom 30.8 35.2 46.5 53.2
United States 21.6 24.6 36.4 40.5
OECD total 24.8 30.5 42.2 51.7
Source: OECD
Table 1.2: Escalation of early retirement
Per cent of male population aged 55 – 64 in the workforce, selected countries
1980 1990 1995 2000
France 65.3 43.0 38.4 38.5
Germany 64.1 52.0 48.2 48.2
Japan 82.2 80.4 80.8 78.4
United Kingdom 62.6 62.4 56.1 59.8
United States 69.7 65.2 63.6 65.6
Source: Fenge and Pestieau (2005, page 6), OECD
Table 3.1: Asset prices in closed and open economies
Closed Economies Open Economies Interest rate
Year USA EU Japan USA EU Japan (per cent)
2000 1.000 1.000 1.000 1.000 1.000 1.000 9.0
2010 1.086 1.066 1.026 1.081 1.063 1.047 9.3
2020 1.109 1.095 1.012 1.114 1.074 1.064 9.3
2030 1.078 1.044 1.004 1.086 1.028 1.017 10.0
2050 1.125 1.009 0.959 1.082 1.039 1.016 12.2
Source: Fehr et al. (2005).
Table 3.2: Sustainable policy options and retirement age
Long-run equilibrium
Initial period Tax increase Benefit reduction FRA increase
Low skilled 62 65 65 71
Medium skilled 65 67 69 73
High skilled 66 69 70 74
Source: Eisensee (2005)
Table 3.3: Schooling, retirement, and growth Depreciation rates
Physical capital Human capital
10 % 8.5 %
0 % 0 %
Life expectancy 77 80 77 80
Schooling years 17.33 17.5 24.55 24.91
Retirement age 62.0 63.3 55.3 56.2
Growth rate ( %) 2.00 1.95 4.7 4.63
Source: Echevarria (2004), Case I &II
Table 3.4: Welfare and efficiency effects from social security privatization (in $ per household) Welfare effects for selected productivity classes
Age in reform year/
Birth year
Class 1 Class 3 Class 5 Class 8
Efficiency effects
79 -4.800 -5.700 -14.700 -79.300 0.00
60 -27.600 -43.500 -64.400 -361.800 0.00
40 -18.700 -46.700 -76.400 -368.400 0.00
20 2.200 -1.500 -5.200 -15.500 0.00
0 32.800 33.700 36.100 43.400 -5.600
∞ 52.400 56.700 63.500 84.300 -5.600
Source: Nishiyama and Smetters (2007), Table 9.
Figure 1.1: Dimensions of pension reform
Figure 2.1: Shocks to labor income and stock market returns in the model economy Generation t is considered from time “rawls” in the case of rawlsian risk sharing
and from time “interim” in the case of interim risk sharing.
Fully
funded Degree of
funding Pure
paygo Tax-
Benefit Link
Flat Benefit
●
”1970”
●
”Today” Reform A
Reform C Reform B
Perfectly actuarial
Generation
t + 1
rawls
t Period
t
t + 1 t + 2
interim Young
Exposure to λt
Old
Exposure to rt+1 Young
Exposure toλt+1 Old
Exposure to rt+2
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